I thought a bit about the recent Krugman controversy, and here’s my opinion, for what its worth…
I have a lot of respect for Krugman, but his column has me worried about whether he will become Mankiw. The public doesn’t buy and won’t buy the idea that large deficits can be run forever without consequences. There might be enough gullible people out there to believe (twice) that at roughly current tax rates, a rate ct cut will reduce the deficit, but one way or the other, free lunch or not, people prefer small or no deficits to large ones. Recall – GW’s “economic blueprint” – however ludicrous – was sold as a way to boost the economy and pay down the debt right from the start. Section 1 was entitled “Pay Down the Debt.
I really don’t see how you sell the public on the idea, as stated by Krugman, that we have to run deficits or the other guy will spend the money later, even if its true that the other guy will spend the money later, and in worse ways.
Once you start the policy of running these deficits forever, regardless of your reason for doing so, you have to sell it. The sales pitch is basically that running big deficits is not a bad thing because you’re spending it in ways that produce larger returns than they cost. But if the deficit is large enough, and the government is spending on enough things, that is unlikely to be true – there are decreasing returns to everything, including, obviously, government spending.
I’ll take the Krugman’s column as a discussion of strategy tinged with frustration. I can accept that depending on where money is spent, we are not yet at the point where decreasing returns to scale sets in. I’ve written about the need for more infrastructure before. I’m willing to accept, provisionally, that if done right, the economy will grow faster with universal healthcare.
But I also remember this – Mankiw was right, to some extent, too – at some point, tax rates are high enough that cutting them will boost the economy. No reasonable or honest person would say otherwise. However, at some lower tax rate, that ceases to be true – a tax cut will result in a marginally worse performing economy. Reasonable, honest people can debate where that point happens to be. One might say X, the other Y, and those may even be wide apart. But if tax rates drop even further, there comes a point where no honest or reasonable person would conclude that a tax cut will be on net, a benefit.
And there is the difference that I personally think still exists between Krugman and Mankiw. I think there are many reasons to look out onto the abyss, as Krugman is now doing. But if Krugman comes back from the abyss as the Democrat’s Mankiw, it will be a very bad thing, and it will be a worse one if Democrats treat their Mankiw with the deference Republicans have given the good doctor.